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April 2010 Commentary

April 2, 2010

Our employment picture and our economic recovery got a little clearer today. Jobs in our economy increased 162,000 in March – this is the largest increase in nonfarm payrolls in three years. The increase in employment was broad based with 60% of all industries adding jobs. The median expectation from 83 economists was for a gain of 184,000. We don’t think that it is time to pop the cork and celebrate as these gains still left the unemployment rate at 9.7%.


This is one of the weird days on the market’s calendar, as it is Good Friday and the stock is market closed, but economic reports (like the employment data) still get released and the bond markets operate on a shortened session. On second thought, maybe this is a good idea as it keeps the stock markets from having wild mood swings as it tries to come to grips with the numbers.


Speaking of numbers, earnings season is upon us. Alcoa will be the first out of the gate and is scheduled to report on April 12. Comparables of this past quarter to last year’s first quarter will still be pretty easy – the trick, as always, will be top line revenue growth and meeting the market’s expectation for earnings. We are optimistic for corporate earnings (Bloomberg Data expects a 30% increase in S&P 500 first quarter profits) because of increases in manufacturing activity and consumer confidence. For example: the Institute of Supply Management’s factory index jumped to 59.6 – this number exceeded economists’ most optimistic forecast.


In previous Current Thinking letters, we spoke of the spread between two year Treasuries and 10 year Treasuries. A large positive spread, which describes a positively sloped yield curve, is good for business and that banks can “feast” on this spread as their lending activities increase. As of this writing, the two-year Treasury is yielding 1.05% and the 10-year is at 3.87%, which equates to a positive spread of 282 basis points. Although rates have risen as a whole, they have done so equally across the curve. (A negative example would be if two year yields would jump up to say 2.50% and 10 year yields moved up to 4% for a spread of 150 basis points.) The point is that our economic climate is still very positive.


The bad news – expect steel prices to jump up considerably. Steel contracts based on iron ore pricing has been changed. The main stream media has missed this event (it was extensively reported on in The Financial Times over the past two weeks). Expect this to be disruptive to the market place. Also, expect the Chinese to reset their currency peg to the U.S. dollar. Quick history lesson: China set the yuan at roughly 8.3 per U.S. dollar in 1995 through July 2005. Then there was a policy shift by the Chinese government, which allowed for fluctuations by the yuan against an undisclosed foreign currency basket. After the yuan saw a 21% gain, which hurt Chinese exporters, the Chinese government began efforts to restrain the yuan’s value in July of 2008. It is this restraint that brings them to the brink of being called a “currency manipulator” by the Obama administration.


We are still very positive on U.S. equity markets. The health care legislation that has been passed was not “…the end of the world as we know it…” per some political commentators. No doubt it has been overhanging the equity markets. The U.S. dollar continues to strengthen, which adds to our enthusiasm for our markets. We are still staying very short with our with bond maturities. We expect upward pressure on interest rates, as we have seen, and expect more to come, albeit slowly as inflation is still not an issue.


Erick Zanner

JDM Investment Counsel


Information contained herein has been obtained from sources believed to be reliable, but are not guaranteed. This article contains the opinions of the author and is subject to change without notice and is not a recommendation of any particular investment product or security.